SEC Charges Former New York Pension Official and Two Brokers in Pay-to-Play Scheme

The Securities and Exchange Commission today announced fraud charges against a former official of the nation’s third largest public pension fund and two brokers accused of orchestrating a pay-to-play scheme to steer billions of dollars to certain firms in exchange for luxury gifts, lavish vacations, and tens of thousands of dollars spent on cocaine and prostitutes.

Navnoor Kang, who served as the director of fixed income for the New York State Common Retirement Fund from January 2014 to February 2016, allegedly used his position to direct up to $2.5 billion in state business to Gregg Schonhorn and Deborah Kelley, who were registered representatives at two different broker-dealers.  In exchange for this lucrative business, which netted Schonhorn and Kelley millions of dollars in commissions, the brokers provided Kang with tens of thousands of dollars in benefits, including:

• More than $50,000 spent on hotel rooms in New York City, Montreal, Atlantic City, and Cleveland.
• Approximately $50,000 spent at restaurants, bars, lounges, and on bottle service.
• $17,400 on a luxury watch for Kang.
• $4,200 on a Hermes bracelet for Kang’s girlfriend, at Kang’s request.
• $6,000 on four VIP tickets to a Paul McCartney concert in New Orleans.
• An extravagant ski vacation in Park City, Utah, including a $1,000 per night guest suite.

“Kang owed a duty not only to the New York State Common Retirement Fund but to the more than one million public servants and beneficiaries that are served by the fund, including police and fire personnel who count on their pensions to take care of them and their families,” said Andrew J. Ceresney, Director of the SEC Enforcement Division.  “This action demonstrates that the SEC will not tolerate public officials who abuse public pension funds to satisfy their own greedy and wanton desires.”

According to the SEC’s complaint, Kang, as a fiduciary to the Fund, had a duty to disclose his solicitation and receipt of the gifts and entertainment he received from Schonhorn and Kelley but failed to do so.  Schonhorn and Kelley knew Kang was not disclosing his activities to the Fund, and they took steps to keep the benefits a secret.  Kang, in soliciting and accepting the benefits without any disclosure, violated the antifraud provisions of the Securities Act and the Exchange Act.  Schonhorn and Kelley participated in the fraudulent scheme and provided substantial assistance to Kang in concealing the scheme from the Fund, thereby violating the antifraud provisions and aiding and abetting Kang’s fraud.

“We allege that rather than compete fairly for business from the New York State Common Retirement Fund’s $50 billion fixed income portfolio, Schonhorn and Kelley bribed their way in, lining their pockets with millions in commissions along the way,” said LeeAnn Ghazil Gaunt, Chief of the SEC Enforcement Division’s Public Finance Abuse Unit.  “Moreover, they allegedly assisted Kang in covering up his misdeeds, with Kelley going so far as to help Kang obstruct the SEC’s investigation.”

In a parallel action, the U.S. Attorney’s Office for the Southern District of New York today announced criminal charges against Kang, Schonhorn, and Kelley.

The SEC’s complaint charges Kang, Schonhorn, and Kelley with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  Schonhorn and Kelley also are charged with aiding and abetting Kang’s violations.  The SEC is seeking an order of permanent injunction and disgorgement plus interest and penalties.  Additionally, the SEC is seeking a conduct-based injunction against Kang that would permanently enjoin him from participating in any decisions involving investments in securities by public pensions as a trustee, officer, employee, or agent.

The SEC’s continuing investigation is being conducted by Public Finance Abuse Unit members Brian Fagel, Eric Celauro, and Jason Howard.  The SEC’s litigation will be led by John E. Birkenheier and Alyssa A. Qualls.  The case is being supervised by Ms. Gaunt and Timothy L. Warren, Associate Regional Director of the SEC’s Chicago Regional Office.  The SEC appreciates the assistance of the U.S. Attorney’s Office for the Southern District of New York and the Federal Bureau of Investigation.